Russian energy startups set sights on Latin America

Traditionally, Russian business in Latin America may have revolved around two products – importing bananas and flowers – but as the governments of Mexico and Ecuador open up their lucrative oil and gas industries to foreign companies, Russia’s innovative startups are hoping to win a slice of the market with their hi-tech solutions.

The Skolkovo energy delegation will visit Mexico City and the Ecuadorian capital Quito (above). Photo: Pixabay.

This week, 10 representatives of five startups belonging to the Skolkovo Foundation’s energy cluster are embarking on a business mission to Mexico City and Quito, spending two days in each city with the aim of establishing business contacts and projects there.

The markets have great potential, experts agree, but entering any foreign markets can be a tricky and time-consuming process. Ahead of the business mission, Skolkovo hosted an information session and webcast for all the foundation’s residents seeking to enter Latin American markets, at which experts on the region shared their experience and advice of working there.

“Interest in Latin America is colossal,” said Dmitry Politov, director of the Skolkovo Foundation’s international cooperation department, introducing the event on Tuesday. That interest is not limited to companies working in the energy sector – also at the meeting were representatives of Skolkovo’s biomed cluster – but all the companies taking part in the business mission have developed solutions for the oil and gas industry.

“Both Mexico and Ecuador, like us, are oil-producing countries, and we have similar problems and ‘diseases,’” said Vyacheslav Vlasik, an advisor to Russia’s national committee for economic cooperation with Latin America.

“Just like in Russia, those countries’ oil production is falling and the quality of the oil has decreased. That’s why the Mexican government took the decision to end [state oil company] Pemex’s monopoly on the country’s oil resources” in 2013, he said.

That decision opened up the market to foreign companies and capital, meaning a wealth of opportunities for Russian companies working in solutions for the extraction and processing of natural resources.

“In December this year, a tender is due to be held for a very large deposit in the Gulf of Mexico,” said Vlasik. “Our companies are also expected to take part. It’s a big deposit, and not an easy one: 2,000 metres deep. Not all countries have the technology for that,” he said.

Yan Burlyai, who has behind him a 45-year career in Russia’s Foreign Ministry specialising in Latin America and is now director of the centre of Ibero-American programmes at Moscow State Linguistic University, agreed that there are opportunities in Mexico for Russian hi-tech companies.

“The oil and gas industry [in Mexico] is being modernised right now, and new technologies are being sought,” he said.

And if in Mexico, U.S. companies have already occupied a lot of market niches, this is not the case in Ecuador, said Burlyai, a former ambassador to Ecuador. “There are far fewer American companies in Ecuador, so there are more opportunities there, in my honest opinion.”

Ecuador’s state economic development plan for 2013-2017 gives a key role to strategic industries including energy, transport, renewable resources and telecoms, he added.

Skolkovo Foundation president Victor Vekselberg (left) shakes hands with Ecuador's president Rafael Correa during the latter's visit to Skolkovo back in 2013. Photo: Sk.ru.

Working with the state

The state’s strict control of access to its natural resources in both Mexico and Ecuador means that the role played by the state in industry and business is a big one, and the key to success in entering those markets is undoubtedly working together with the government, the experts present at Skolkovo’s Hypercube on Tuesday agreed.

In this respect, Skolkovo, which regularly hosts official foreign delegations, can act as a go-between its startups and government representatives.

Relations with Mexico and Ecuador are traditionally very good, said Burlyai, a former ambassador to Ecuador.

“In Mexico, they know and love Russian culture, literature and art,” he said, noting that the poet Vladimir Mayakovsky had been there, and that the filmmaker Sergei Eisenstein had worked on a film there.

Vlasik agreed. “Latin America has traditionally been our partner. For the last few years, we have been slowly but surely clawing back the position that was won by us in Soviet times in this region,” he said.

Experts on Latin America share their advice and experience at Skolkovo's Hypercube last week. Photo: Sk.ru.

Regional stumbling blocks

However, companies seeking to enter the markets there will also have to overcome some hurdles. Most Latin American countries have free trade agreements with each other, meaning Russian companies will start off with a disadvantage, said Sergei Nosov, deputy director of the Asia, Africa and Latin America department of the Economic Development Ministry.

“That means your technology will cost 15-20 percent more than competitors,” agreed Vlasik. “We need equal access to the Latin American markets,” he said, expressing the hope that Russia would also eventually sign free trade agreements with the region’s countries.

Corruption can also be a problem: Ecuador’s state oil company Petroecuador was hit by a corruption scandal last year, and several governors have recently been arrested in Mexico, said Vlasik.

“There [in Mexico], corruption has turned into open banditry and kidnappings – Mexico is not always a safe place,” he warned.

Vlasik advised Russian companies to pay close attention to the terms of their contracts before entering into any agreements in Latin America.

“Today, some of our [country’s] projects in Ecuador have found themselves in a very dramatic situation,” he said, referring to a report in Vedomosti earlier this month that the export branch of Russian energy company Inter RAO could lose its 2013 contract to supply equipment for a hydroelectric station and thermal power plant there.

Nosik also acknowledged that corruption can also be a problem for biomedicine and pharma companies, which depend on state bodies to obtain registration of their drugs or medical devices.

Russian-Ecuadorian trade is dominated by bananas. Photo: Pixabay.

It’s not impossible

The obstacles are not, however, insurmountable, as demonstrated by Stanislav Stepanov, general director of Volnovye Geo Tekhnologii, one of the Skolkovo startups taking part in this week’s business mission. Stepanov helped to organise the trip, having worked in Ecuador for several years. His company was able to launch a pilot project there funded by an Ecuadorian partner, he said.

He acknowledged that Russian hi-tech entrepreneurs in Ecuador are currently few and far between.

“If you tell people you’re working in Ecuador, everyone assumes it’s either flowers or bananas – or very occasionally, avocados,” he said.

Anna Pilas, a senior expert at the Russian Export Centre, confirmed Stepanov’s experience. Her agency, which offers Russian companies seeking to enter international markets a range of support mechanisms, has not seen much demand for consultations relating to Mexico and Ecuador: just six for Mexico and three for Ecuador, she said.

For Russian companies undeterred by the difficulties and determined to make the most of the region’s opportunities, state support is available.

The services offered by the Russian Export Centre, which cooperates closely with Skolkovo, include subsidies to help companies pay for the cost of obtaining official certification for their products abroad and for intellectual property registration. These subsidies can cover up to 80 percent of a company’s expenses in these areas, Pilas told the assembled entrepreneurs.